Investors brace for U.S. presidential election

Nation on Tuesday will choose between Obama and Romney

LOS ANGELES (MarketWatch) — Like the rest of the country, Wall Street will likely be on edge next week until it learns the outcome of Tuesday’s presidential election, one of the most closely fought contests in years.

“Come next week, it’s going to be all elections, all the time,” said Erik Davidson, deputy chief investment officer of Wells Fargo Private Bank in San Francisco.

President Barack Obama and his Republican challenger Mitt Romney are each facing the possibility of a razor-thin margin of victory, which carries the risk that the outcome won’t be known Tuesday night, said Davidson.

From an investment standpoint, what cannot be promised is “that the coast is clear come Wednesday [and] that we’ll have certainty,” he said.

Most national polls show President Obama and Governor Romney in a dead heat. The latest average of national presidential-election polls from RealClearPolitics.com on Friday showed Obama was expected to receive 47.5% of votes, and Romney to win 47.2% of votes.

In another average of polls from the same site, Obama was ahead in eight of 11 so-called swing states, which are expected to decide the outcome of the election. If the president were to maintain those leads and win those states, he would end up with 290 electoral votes, or 20 more than he needs for re-election.

If there’s no change in congressional control, “are we not set up for more stasis? That is a risk,” said Troy Logan, managing director and chief economist at Warren Financial Services. Investors have been worried that if Congress doesn’t solve the so-called fiscal cliff by year’s end, a number of actions will be triggered that will result in roughly $400 billion in tax increases and $200 billion in spending cuts.

But “we think there are enough incentives, especially on Congress, that a deal of sorts will get struck. We have too much to lose to have the year end and the U.S. fall off the fiscal cliff,” said Logan.

“We’re not saying it wouldn’t happen,” he added, noting the wrangling in Washington over raising the debt ceiling. “As a country we’ve been burned by this before, but we think there are self-preservation interests in Congress, and odds are that cooler heads will prevail.”

Besides the election, investors will also digest economic data next week.

The economic calendar will be less packed than the previous week, but investors are still set to receive the services-sector report from the Institute for Supply Management on Monday, with a dip to 54.5 expected in its index. Federal Reserve data on U.S. consumer credit are due Wednesday.

Also, weekly jobless claims are due Thursday as is the September reading of the trade deficit, which is expected to widen from August. Wider trade deficits put pressure on economic growth. A report on November consumer sentiment and wholesale inventories are due Friday.

While the bulk of quarterly financial results from corporate America have already been released, slated to arrive next week are reports from energy-services company McDermott International Inc.
MDR, -2.60%
, health insurer Humana Inc.
HUM, +0.19%
and media conglomerate Time Warner Inc.
TWX, -0.59%

Memorable week

This week was especially notable on Wall Street as stock trading was closed on Monday and Tuesday in the wake of then-Hurricane Sandy which left dozens dead and devastated communities in the East Coast. The two-day closure was the longest amount of time since 1888 that equity trading had been shut because of weather conditions.

On Friday, investors were cautious ahead of the general election, with stocks relinquishing gains following the better-than-expected U.S. employment report for October. The Dow Jones Industrial Average
DJIA, -0.93%
on Friday sank 139 points to 13,093.16. The S&P 500 index
SPX, -0.93%
fell 0.9% to 1,414.20 and the Nasdaq Composite
COMP, -1.42%
lost 1.3% at 2,982.13. Read: U.S. stocks fall sharply; election eyed.

In the last comprehensive look at the labor market before the election, the government reported nonfarm payrolls increased by 171,000 in October. That surpassed economist expectations for the addition of 120,000 jobs. The unemployment rate rose to 7.9% from 7.8% as more people started to look for work. See: U.S. adds 171,000 jobs in October.

Stocks this week closed the books on a rough October, marking the first monthly decline for equities since May. The Dow industrials fell 2.5% for the month, and the S&P 500 index slumped 2%. The Nasdaq Composite
COMP, -1.42%
lost 4.5%.

Much of the pressure on the market was due to lackluster quarterly corporate results, particularly sales figures.

With just about more than half of the expected financial reports having been turned in, Logan at Wells Fargo said what they’ve seen is a slowdown in revenue growth, with average growth of 1.1% on a year-over-year basis. In the second quarter of this year, revenue growth averaged 4% compared with same period in 2011.

Logan noted that revenue growth among companies in the S&P 500 hasn’t been as strong as for those in the S&P MidCap 400 or the S&P MidCap 600, because slowing growth worldwide is hurting large U.S. companies that have 40% to 60% of their sales overseas.

Smaller companies that have a higher concentration on domestic sales “is a larger theme that we’ve been playing all year,” he said.

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